You invest your hard earned money into your super fund so that it will make you money.

This means you should monitor your super fund’s investment performance to make sure it is earning you reasonable rates of return. To do this you need to understand how to make sense of your super fund’s earnings figures.

When super funds talk about investment performance they use many terms that may confuse us. They even confuse many people who run super funds. Investment performance is a measure to describe how much interest your super fund is earning for you. Investment performance is also sometimes called the investment return.

Super funds’ investment earnings also come in various shapes and sizes depending upon the type of super fund you are a member of, and what type of fee and tax structure is in place.

Not-for-profit super funds

If you are a member of a corporate, government or industry fund (ie, a so-called not-for-profit fund) your super fund will usually talk about its investment performance in terms of its "earnings" rates and its "crediting" rates.

The earnings rate is the investment performance earned by the super fund’s fund managers. The crediting rate on the other hand is the investment return actually deposited into members’ accounts, in other words the interest they personally receive each year after all fees and taxes have been deducted.

For members, the crediting rate is obviously the most important thing. The difference between what the fund earns and what the fund pays into members accounts is absolutely crucial to understanding how your super fund operates. Members should really focus upon the crediting rate because what you get in your account is what matters. But the earnings rate is a good way to judge how effective your super fund is at selecting fund managers and choosing investments and because of this superannuation funds too often talk to members about their earnings rate and confuse themselves and their members.

So why is the earnings rate different to the crediting rate? The earnings rate earned by your super fund is after the fund manager’s fees have been deducted.

The super fund will then have to pay investment taxes and pay other costs associated with operating the super fund. The super fund may also divert some of the earnings rate into a reserving account. When super funds achieve high earnings rates they use a reserving account to store excess returns so that in years when earnings rates are down they can dip into this account to top-up the members crediting rate to make it higher than it would otherwise be. With 45% of super fund using a reserving account strategy it is obviously still a very popular strategy for super funds.

Master trusts

Master trusts do not usually talk in terms of earnings and crediting rates. They instead just talk about investment returns.

For many - but by no means all - master trusts their investment return figures are really just their crediting rates. And because it’s a crediting rate, it’s after all fees and taxes have been deducted. But confusion can arise for master trusts that have tiered fee structures.

A tiered fee structure is one where the fees differ depending upon how much the member has invested with the super fund or how much is the an employer’s combined company account. For example, if you have less than $50,000 in your super fund account you may pay 2% in fees but if you have more than $50,000 in your super fund account you may pay fees of only 1.3%.

This means that two people in the same super fund may pay different levels of fees. This also means that each person in the same fund can have different crediting rates depending upon how big their super account balance is. Why? Because your crediting rate is after all your fees have been deducted and if you pay higher fees you will receive a lower crediting rate.

The thing to be careful about when comparing master trust returns with returns from other funds is whether the investment return they publicly declare is before or after taking into account these tiered fees. In other words, is it what members actually receive in their accounts or is before the tiered fee cuts-in? The problem is that sometimes it is unclear.

Just because master trusts do not use terms like earnings and crediting rate doesn’t mean these concepts don’t exist. Illustrating this, master trusts with tiered fee structures may declare an investment return that is after investment management fees but which does not deduct other fees like the 1.5% administration charge.

And this can sometimes mean that members become confused when they here that their master trust "earned" 10% even though they may only receive 8.5% as their crediting rate in their personal account. Because of this, a growing number of master trusts now publicly declare crediting rates that assume a member pays the maximum fee, ie no discounts due to high balance levels.

This means it’s a true crediting rate and if you are lucky enough to have a high balance and pay low fees you could actually be getting even higher crediting rates in your personal account. The following table describes how your super fund uses all these factors to calculate your personal crediting rate.

Capital gain from fund’s investments	10.0%
Less investment fees paid to fund managers	0.5%
Fund earnings rate	9.5%
Less other operating costs and taxes	1.0%
Less or plus amounts diverted or retrieved from reserves	0.3%
Less fees not already deducted, eg, administration fees	1.5%
Fund crediting rate paid into your super account	6.7%

Comparing not-for-profit funds and master trusts

Comparing different super funds’ investment returns fairly means we have to compare the same things, like for like. SelectingSuper does this by contrasting crediting rates, which as we have seen, is what the member gets after all fees and taxes have been deducted.

This means we can only assess super funds that declare a crediting rate or where we can derive a crediting rate. For master trusts that don’t declare a crediting rate we can estimate one using their disclosed fee structure. For corporate, government and industry super funds that don’t declare a crediting rate (like some defined benefit super funds) it is not possible to fairly derive one and so we can’t examine them in this context.

Compare rolling returns, not just last year’s figures

Superannuation is a long term investment. Members however should obviously watch their super fund’s short term performance for warning signs but the more important measures are how well is your fund performing over several years rather than just how they went last year.

Rolling returns are calculated by deriving the compound average over 3, 5 and sometimes 10 years. The higher the rolling average, the better the fund over the longer term.

Investment options and performance.

Super funds now offer their members many investment options. Each different investment option invests into different asset classes using different investment strategies. Some are aggressive with lots of international shares, some are conservative with lots of government bonds and cash, some are growth with a reasonable mix of shares and property and some are balanced with a fair spread across all major asset classes.

In general, the more growth assets in your investment option the better the long term return. But the trade-off is the return can be more volatile, meaning it can go up and down more often. This is called risk.

So when comparing investment returns across different types of investment options, always consider the risk-reward trade-off. For example, international shares have paid high returns over the last decade but these investments can be more risky while cash has paid much lower long term returns but with much less risk. You must consider these issues when selecting your investment options.

For more information about the best investment options for you may wish to seek investment advice.

The SelectingSuper investment performance tables

The SelectingSuper investment performance tables let you examine the market averages for different types of super funds, different market segments, and different asset classes. You can also examine all the investment options offered by each super fund.

We examine 1, 3, and 5 year rolling returns, where the return is the crediting rate. By sorting each table by each column you can assess which is the best fund in each situation and judge the volatility of this return especially if you contrast this against the market benchmark or average.

Contact us for more information.